Pension system worst problem of Russian economy

The pension system remains the worst problem of the Russian economy. It is experiencing an acute crisis and in its present form it has no future. Most experts believe that in the current shape the Russian pension system is not viable, and nobody has the slightest idea of how to go about the business of transforming it without a social explosion. It looks like Russia’s future retirees will have to save for a rainy day on their own.

Last week’s publication of a report by the working groups for the correction of Strategy 2020, and of an article by the first deputy president of the Bank of Russia, Alexei Ulyukayev, in the daily Vedomosti triggered another discussion of the pension problem. A team of experts under economists Yaroslav Kuzminov and Vladimir Mau presented to the government for discussion their initiatives for a return to the taxes-based system of levying social deductions, for quasi-voluntary deductions from the average wages, for the reduction of the rates of social deductions from 34% to 26% and for increasing the retirement age.

Other leading economists joined in the discussion. Former Finance Minister Alexei Kudrin in a joint article with economist Yevsei Gurvich in Voprosy Ekonomiki (Economic Affairs) magazine called for fundamentally adjusting the pension system and considerably reducing the number of retirees by raising the retirement age.

However, Ulyukayev’s article caused the greatest stir. He claimed that the Russian pension system was not viable and the chosen model was a dead end. He suggested the most cardinal way – paying the government-financed part of the pension as an old age social benefit. In size it is to be pegged to the minimum subsistence level of a retiree, which in Russia these days is set at 4.961 rubles (150 US dollars), and in Moscow, at 7,137 rubles (230 dollars). Ulyukayev suggests making the other component of the pensions a responsibility of individual and corporate programs.

In a word, the government will be providing only the basic minimum, while the pensioner’s other incomes are to come from one’s own savings and from descendants. To cut a long story short: there is nobody to count on but one’s own self and one’s children.

Ulyukayev suggested abolishing the Pension Fund. “There is no such problem as the Pension Fund’s shortage. It is nothing else but a transit account for transfers from the federal budget. It is to be incorporated in the federal budget. Pensions are an ordinary budget spending article,” he said.

Kommersant-Dengi magazine says that Ulyukayev’s article is called for paving the way for a fundamental revision of the entire model of pension insurance, and also for testing the public’s response to the idea of the government’s gradual refusal to honor its fundamental social liability. “The elections are a bygone, so time is ripe to stop telling fairy tales to the electorate,” the magazine said.

But for the high oil prices, the situation in the Russian pension system would be truly disastrous. The Pension Fund’s deficit in 2012 will reach 1.75 trillion rubles, that is three percent of the GDP, or 14 percent of federal budget spending, which is used to cover the PF deficit. The point at issue is not so much the size of the deficit, as the pace of its growth. Last year the shortfall of the PF’s accounts was over one trillion. Such a fast growth in the PF deficit was largely an effect of the authorities’ election pledges. But the elections merely worsened the situation, and the main determining factor is the demographic one.

In conducting the pension reform at the beginning of the 2000s the authorities did not dare dismantle the distribution system, but introduced an accumulation system to complement it. The latter was expected to gradually substitute for the government financing of pensions. That did not happen. For a number of reasons, including the crisis, the basic concept was called in question – the stability of long-term incomes from savings.

Deductions from the wages and salaries of employees are not enough to pay retirement pensions. Now there are 40 million pensioners per 75 million of economically active citizens, and the proportion will be getting worse. According to the federal statistics service Rosstat, the share of the population past the retirement age is 22 percent, and by 2020 it will rise to above 25 percent, and by 2030 it will approach 30 percent. According to official statistics, 13.5 million retirees keep working and getting salaries and pensions at the same time.

For some social reasons the authorities have so far been unable to raise the retirement age. But even if they did dare take such a step, that would be of little help. According to universally recognized estimates, the PF would save a tiny 80-90 billion rubles a year, should the retirement age go up to 62 years, which is a tiny fraction of the deficit.

Possibly, in the long term the implementation of the approach Ulyukayev has proposed would create a new class of economically responsible Russians, but in the foreseeable future it would split up the pensioners into the poor and very poor, says Kommersant-Dengi.

The chief architect of the pension reform at the Health and Social Development Ministry, Deputy Minister Yuri Voronin, insists the incorporation of the Pension Fund in the budget system would be irrational and impossible.

“The retirement pension is not a budget transfer, contrary to what Alexei Ulyukayev argues. It is a reserved part of the earnings, saved for the old age,” he said in Rossiiskaya Gazeta. “The root cause of our pension system is the low wage level. Hence the low pensions, and they cannot be different.”

“The problem is none of the specialists knows how to make the accumulation system work in principle,” the on-line periodical Svobodnaya Pressa quotes an expert at the Center for Macroeconomic Analysis and Short-Term Forecasting, Yelena Penukhina, as saying. The incurable deficit of the Pension Fund plus the snowballing demographical problems have achieved a level where the state is hopelessly in a dead end, she says.

Now the government is faced with an insoluble dilemma: whether it should save the small business, encourage economic growth and create jobs for able-bodied age people, or support the retirees at least at the current level?

Despite the acute nature of the pension problem the Russian economy is confronted with one should not expect the government to take any drastic steps, says economic observer Maxim Blant on NEWS.ru.com. Even the huge PF deficit continues to be compensated for by high oil prices, so nobody will take risks of causing a social explosion. “However, already now it is clear that the fragile structure, based on soaring oil prices, may collapse any minute, and the chances today’s 30-40-year-olds may get something from the state when they turn 60-65 are few,” the analyst said.